Valuing major miners: BHP and Glencore

By
Marc Ashton
22 August 2014

Editorial

With banking sector shares attracting negative attention from ratings agencies and retailers been sold off aggressively this week, investors are eyeing recent developments at resource heavyweights Glencore and BHP Billiton and trying to work out whether there is value to be found in their stock.

As previously noted on Moneyweb (a South African financial news site associated with Mineweb) analysts are bullish on the prospects for Glencore and believe its portfolio mix is one of the more defensive in the market. The fact that the company has recently announced it would undertake a $1bn share buy-back with CEO Ivan Glasenberg telling Bloomberg: “The mining companies should start generating cash and using the cash to give back to shareholders,” adding “We really think like shareholders because we are shareholders.”

BHP Billiton on the other sold off sharply after presentation of its full-year financial results for the year ended 30 June 2014.

While it is not necessarily a fair comparison because of slightly different asset mix, BHP Billiton trades on an historical price to earnings (PE) multiple of around 13 and has a dividend yield of 3.5% while Glencore - which joined the JSE in November 2013 - trades on a PE multiple of 16 and offers a 1.8% dividend yield.

On those metrics, BHP Billiton would appear to be the better mix for a retail investor and Byron Lotter from asset management firm Vestact told Moneyweb that he remains bullish on the stock ”despite an announcement from the company that it would be looking to split off non-core, primarily South Africans assets. Analyst consensus forecast is for both stocks to outperform the market.

Following the full-year results from Billiton, FNB Securities told clients: "BHP Billiton is regarded as offering fair value on a forward PE of 13.7 times and a relatively attractive forward dividend yield of 3.2%.”

Renaissance Capital recently updated its forecasts for BHP Billiton with a “buy” recommendation and a 12-month price target of R390 per share on the JSE listing for BHP Billiton while rating Glencore as a “hold”.

However, in the near-term this doesn't impress the team from Credit Suisse Private Clients who downgraded the stock to a "sell". They told clients: "BHP reported 11% YoY growth in underlying earnings to USD 13.8 bn, in line with consensus, supported by efficiency improvement/cost cutting. Importantly, however, BHP disappointed the market on capital management with progress on net debt reduced down to USD 25.8 bn, but failing to meet the company's targets and thus pushing out a potential share-buyback into 2015, at best. BHP outlined some details on the spin-off of non-core assets by mid-2015, but no debt will be injected into the new entity which would have provided more flexibility to distribute cash to shareholders, we believe. We downgrade our recommendation to SELL from BUY, given rich multiples and no clear short-term catalysts.”

UK investment group Hargreaves Lansdown says that according to its analyst consensus forecast for Glencore, the company is rated as a "strong hold”.

While shareholders will like the fighting talk from Glencore’s Glasenberg, it looks like analysts still prefer the tried and trusted formula of BHP.

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